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Banks vs. retailers in debit battle

By Claes Bell ·
Thursday, May 26, 2011
Posted: 7 am ET

A furious battle over how much banks can charge merchants for processing debit card transactions is raging on Capitol Hill right now. The National Retail Federation has just announced a multimillion-dollar lobbying and advertising effort to ensure it gets its way. Giant corporations with billions of dollars on the line are pouring massive amounts of money into lobbying the government and desperately trying to get the public to care and/or take their side.

So why isn't the public paying attention?

Most people are barely aware of debit card interchange fees, the chunk of money taken out of every debit card purchase by the banks that process them. But those fees do add up. The average debit card interchange fee amounts to 1.14 percent of a given debit transaction. If you spend $1,000 a month on your debit card, which many people do, that's $11 a month. Multiply that times 12 months, and you're paying at least $132 a year in debit-card interchange fees.

Technically, the merchants are paying that $132, but as many proponents of debit card interchange reform will tell you, that bill ultimately gets passed on to consumers, even those who pay only with cash, through higher prices. And the bill for debit processing has grown sharply over time, mostly because, by virtue of their enormous size and ubiquity, the card networks -- Visa, MasterCard and American Express -- have so much power to dictate fees.

But that power will be severely curtailed by the Durbin Amendment, a rider attached to the Dodd-Frank financial reform bill that passed last year and is set to take effect soon. The amendment instructs the Federal Reserve Board to come up with a limit for debit interchange fees. Much to the banks' chagrin, the number the Fed came up with is 12 cents, far lower than the percentage banks are getting now.

As you'd expect, banks are throwing massive amounts of money into lobbying and ad buys trying to get leaders in Congress to pass a measure that pushes back the date the new  interchange limits, which are set to take effect July 21, to allow time for "further study." On the other side, retailers are mobilizing their own teams of lobbyists and advertisers to stop them. It's a veritable clash of the special-interest titans.

So why don't most Americans care? The question I would ask is, "Why should they?"

Consumer advocates will tell you that having debit card fees charged to account holders through their banks is more transparent than rolling it into retail prices, and thus better for consumers. And I think they may have a point there. But $130 a year isn't a huge amount of money for most households, and if you asked most people, they'd probably express more annoyance about rising checking fees and the end of free checking than slightly higher prices at retailers.

In the end, despite banks and merchants claiming to be on their side, consumers are going to be the ones paying for the debit card network, either through higher prices in stores if the banks win, or higher fees on their checking accounts if the retailers win. That's one reason I think that no matter how much the National Retail Federation or the American Bankers Association spends on trying to get people to care about this issue, the public will likely be content to let the industry stakeholders fight it out in Washington, D.C., while they worry about more pressing issues like unemployment and high gas prices.

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May 26, 2011 at 4:22 pm

Actually... the durbin amendment limits what banks can charge card processing clearing houses-- who are still free to charge merchant customers (the guys with the terminals at the kiosk at the mall) whatever they may want... including a percentage of each transaction and a per transaction charge...

May 26, 2011 at 9:26 am

What I find outrageous about the entire debate is how the banking industry appears to have Congress in it's pocket. Threatening consumers with increased fees is a way to get people to have the knee-jerk reaction of no-no-no. When in fact, I do think the fees that small businesses are charged to process debit card transactions hurt them.

As well small banks and credit unions with less than $10 billion in assets are exempted from the caps on interchange fees but they are fighting the Durbin amendment as well.

My personal opinion is that people should absolutely care that huge corporations influence regulatory policy in their favor. It is to no one's benefit but the corporations.

May 26, 2011 at 8:59 am

It's a joke that reatailers will have people believe that if those charges go away, consumers will se prices fall. That's bull...either way that money will line someone's pocket and it won't be he consumer!